Is capitalism perfect?

[Rourke]

Rourke continues to advocate that the initiation of force on the part of the government is good, so long as it leads to stability and working markets. He then asserts that I have not presented any factual evidence for my position and refuses to read books and articles that present the case much more clearly than can be done on a debate forum. Each one of your so called fallacies against the free market are answered in Capitalism: The Unknown Ideal, such as the idea that one can have a monopoly in a free market. If someone creates goods and services that are so good and in so much demand that people want them from that vendor, then that vendor is a "monopoly" only in the sense that it's products or services are far better than the competition or in higher demand.

I'm starting to be a "doubting Thomas" about whether you yourself have read the book. The raving Amazon reviews clearly say that this book is about the moral case for capitalism, NOT the economics of capitalism. So with that, and the fact that you can't even give me one refutation of my arguments from this book, makes it unlikely I will be picking it up soon.

For Windows and Microsoft, would it be expensive to switch over to some other operating system and would such a switch lead to less programs that work on that format operating system? Yes, that's one reason people are not doing that. For Windows, it is very easy for me to go on-line and get any program that I want at a reasonable price, so why should I or anyone else complain that Microsoft has such a large market share? You are creating a problem out of whole cloth -- i.e. imagining a problem where none exists.

Well the link I provided was to help you understand vendor lock-in and its effect on other competitors' ability to enter the market. In essence, in such a case, the market becomes inefficient because 1) the monopoly or near-monopoly (in this case Microsoft) has a lot of power to effectively discourage large numbers of consumers from seeking out a different product for their needs, and 2) this kind of stifling of competition has a chilling effect on innovation.

So, there is no separation of economics from morality, and any attempt to do so is immoral, because one is advocating the initiation of force into voluntary agreements.

You are arguing the concept A) the morality of an economic/political system, while I am discussing B ) the sustainability or viability of such a system. What you are arguing is the equivilant of the following hypothetical discussion:

ME: If I drop this cinder block from 10 stories onto a man's head, would it kill him?

YOU: You are talking about the initiation of force, which is immoral.

ME: Yes, Yes I know. I just wanted to know whether you thought it would kill him?

YOU: Why separate the act of dropping it from the physics of whether it would smash his head to paste? It is immoral!

ME: But certainly you can just tell me what you thought, whether the tensile strength of his skull could resist the force of impact of the concrete block dropped from that height.

YOU: I most certainly will not! The immorality of such a proposed act prohibits me from even considering its implications.

Edited January 25, 2008 by Rourke

[KendallJ]

I'm starting to be a "doubting Thomas" about whether you yourself have read the book. The raving Amazon reviews clearly say that this book is about the moral case for capitalism, NOT the economics of capitalism. So with that, and the fact that you can't even give me one refutation of my arguments from this book, makes it unlikely I will be picking it up soon.

Well, besides the fact that you continue to separate the economics and the moral aspects of capitalism, which is an improper analysis, I'd suggest you pick up a copy of "Markets Don't Fail" by Brian Simpson which does directly address the economics of capitalism, most importantly this notion of perfect, efficient competition that you think represents the fundamental nature of competition. It lies at the heart of most of the major arguments you're making.

The idea of perfect competition as an ideal state is wholly flawed. It consists of the idea that in an ideal marketplace,

a. no barriers to entry exist

b. all competitors are small and unable to influence markets

c. all selling undifferentiated products

d. transparent information exists and all competitors have it

e. all firms are price takers

When you set this as the ideal, then what you've done is define competition as non-competition. That is, firms must compete without any basis for competitive advantage. All sources of competitive advantage then are seen as "imperfect", "inefficient", and "non-ideal". Look at what you're doing, you're attacking all sources of competitive advantage as unfair. In your "perfect" capitalist world, we are all to be the same hamsters running on the same wheels, trying to outdo each other and commoditizing ourselves into oblivion. What is the motivation to innovate, to improve, to outdo? Nothing.

But this is exactly what competition does not consist of. Competition consists of trying to outdo your competition on some aspect. That drive is what causes people to innovate. The profit motive is about differentiation, rivalry and competitive advantage. To claim that these sources of profitability are improper aspects of the market is really not discussing capitalism at all.

Well the link I provided was to help you understand vendor lock-in and its effect on other competitors' ability to enter the market. In essence, in such a case, the market becomes inefficient because 1) the monopoly or near-monopoly (in this case Microsoft) has a lot of power to effectively discourage large numbers of consumers from seeking out a different product for their needs, and 2) this kind of stifling of competition has a chilling effect on innovation.

Really? this is why the tech industry, including software is one of hte hottest VC investment pools in all of business. Because innovation is being stifled? This is why Google is smashing into Microsoft and rallying investors to its cause? Please!

You are arguing the concept A) the morality of an economic/political system, while I am discussing B ) the sustainability or viability of such a system.

Thomas isn't arguing with you on the right basis, that's true. Your economic arguments are flawed.

Edited January 25, 2008 by KendallJ

[Rourke]

Yes, I do understand this. It is economics 101.

That is my fault for not explaining this clearly. My point in that statement is that it is FALSE.

The belief that if someone has a lot of wealth, that there's little left for everyone else is a commonly held falsehood. This is because wealth is created... (fill in the rest of my post)

There is a difference between disparity of wealth and the point you are making, that there is no finite amount of wealth. I agree with your point, in fact I agreed with it in the last post, but maintain that it is beside the point. Take the example of a two cars traveling at 30 mph. One is accelerating by additional 5 mph every 10 seconds, whle the other is increasing its speed by 20 mph every 10 seconds. Both cars are increasing in speed, but the disparity between the two is widening. So, relating it to the economy and my point, this widening gulf appears to lead to increased power and control in the hands of a small group of people.

It doesn't force anyone to do anything. They CAN chose not to distribute to Walmart for the prices Walmart is demanding. They may make less money, but they don't have a right to get paid X dollars, they have the right to earn that money through voluntary trade. Snubbing Walmart may not be a good business decision, but that has nothing to do with force (guns, knives, tanks).

You are being obtuse here. We are discussing laissez-faire capitalism, and in this mode of thinking the efficiency of the market mechanism is everything. In this case, any supplier such as Procter and Gamble, who wants to stay in business, must sell through Walmart, a virtual monopsony. P&G has little negotiating power in determining price, it is pretty much dictated by Walmart. If P&G is to stay in business, they must accept the price that Walmart states due to Walmart's dominance in the retail market. This is real power by one company to control prices and determine what is manufactured and and sold across the expanse of the whole economy.

[Tenure]

What in the hell do you mean, 'power' and 'control', Rourke? Could you explain how a large corporation like Microsoft controls people, using it's power to force people into making decisions? No, I'm not asking you how Microsoft stays competitive, I'm asking you, how does Microsoft force people to play into it's plans for each Finanical Quarter?

By saying that suppliers must 'submit' to the evil rule of King Walmart, do you mean this in the same way that men must submit to those damned laws which state he can't kill a man and just take his money? Those cruel, harsh rules that force him to sell his products to the person who is buying them?

The reason one can't separate the morality from the economics, is that economics just means 'what is happening', for example, 'How much money is this person earning?'. If you're going to start discussing quality of life, or what is a 'fair wage' or a 'fair system', then you're immediately bringing morality into it. Morality is tied to it, because without the moral standards, economics is just meaningless numbers, with no ties to reality.

Edited January 26, 2008 by Tenure

[Rourke]

I too am a linux fan (though, more of an OpenBSD fan). But again, no one is forced to use Windows. Windows is a regular default because it comes with most pre-packaged systems, and it also happens to be what end-users know. Of course, Dell, one of the (if not the) biggest computer vendor in the country sells systems with Linux on them. No one is forced to use Windows. Apple is a good example of that. It's gaining ground against Windows and its users border on fanatical (just like Linux users).

Linux is a techy OS. Microsoft does do some things better with their OS, namely making it easier to use for non-techies. But their OS is pretty much their only thing left. Office usage is dwindling due to OpenOffice, IE usage is regularly dwindling, MS has nothing on Apple and Adobe in the graphic design market. Microsoft is the current top-player because it produced a superior product years ago and got people used to it. Over time, some will take up the time (either for price, or curiosity) and move onto Linux.

I was an Apple user back in college, of course the whole campus used Macs so it made more sense then. But market share for Apple continues to fluctuate but never seems to get above the 5% mark. So its not a threat to Microsoft any time soon. As far as MS Office and IE, they still have a 95% and 76% market share, respectively. With Microsoft dominating the OS market, they can continue to make using alternative office or web browser programs inconvenient to use if one owns Windows (going back to the point about power), to maintain their stranglehold on the market. So of course no one is forced to use Windows, per se, but given the inconvenience of trying another OS, it is clear few will switch.

[KendallJ]

I was an Apple user back in college, of course the whole campus used Macs so it made more sense then. But market share for Apple continues to fluctuate but never seems to get above the 5% mark. So its not a threat to Microsoft any time soon. As far as MS Office and IE, they still have a 95% and 76% market share, respectively. With Microsoft dominating the OS market, they can continue to make using alternative office or web browser programs inconvenient to use if one owns Windows (going back to the point about power), to maintain their stranglehold on the market. So of course no one is forced to use Windows, per se, but given the inconvenience of trying another OS, it is clear few will switch.

But the fact that it is inconvenient to use is a fact of reality. If Microsoft did nothing, it woudl still be inconvenient to use. Again, you have perfect competition built into the argument. The only idea is where we all share market share, and even better where there are many of us so none of us dominate any part of it.

Tell me, let's say we have 3 competitors with 33% market share each. What are those competitors to do? If I innovate to take share, I increase my "power." That's bad. When the first step competitors take away from your insipid equilibria ends up by definition non-ideal, one had better start questioning his idea of ideal.

So of course no one is forced to use Windows, per se, but given the inconvenience of trying another OS, it is clear few will switch.

Well, if the competing product was that much better, then someone would think it worth the inconvenience. It is a pretty well known fact of nature that upstarts don't win against encumbents by making incrementally imrpoved products. There is a bevy of history that says this, but yet upstarts come into being all the time with innovative products and even come to dominate the market. However coudl this be? To use this the example of imperfect competition means you have little understanding of how new entrants actually enter markets in a true capitalist system.

[Tenure]

But the fact that it is inconvenient to use is a fact of reality.

This is the key point here: any statement about 'unfairness' in LF economics, boils down to some simple fact of reality.

We have the same thing with Walmart here, with farmers complaining about being 'exploited' by those 'big Supermarket tycoons!'

It goes something like this:

"I am a Farmer"

"I am Waitrose"

"I want to sell my produce"

"I want to buy produce"

"Hey! How convenient. We mutually benefit from this situation, if we trade with each other"

"Ok, but I don't want to pay more than what your milk is worth"

"Well I think it's worth a pound per litre"

"That's too much. How about 50p?"

"That's outrageous! It's one pound or nothing!"

"Well, I shall trade with your neighbour then, who offers his produce for 50p. I'm not forcing you to trade with me. I'm not even forcing you to trade at all. It's your choice."

"FINE! I'll sell to you for 50p."

"Good."

*Sometime later*

Farmer to Union:

"Those evil fat cats are forcing us to sell to them. BURN THEM TO THE GROUND!"

[Rourke]

The idea of perfect competition as an ideal state is wholly flawed. It consists of the idea that in an ideal marketplace,

a. no barriers to entry exist

b. all competitors are small and unable to influence markets

c. all selling undifferentiated products

d. transparent information exists and all competitors have it

e. all firms are price takers

When you set this as the ideal, then what you've done is define competition as non-competition. That is, firms must compete without any basis for competitive advantage. All sources of competitive advantage then are seen as "imperfect", "inefficient", and "non-ideal". Look at what you're doing, you're attacking all sources of competitive advantage as unfair. In your "perfect" capitalist world, we are all to be the same hamsters running on the same wheels, trying to outdo each other and commoditizing ourselves into oblivion. What is the motivation to innovate, to improve, to outdo? Nothing.

But this is exactly what competition does not consist of. Competition consists of trying to outdo your competition on some aspect. That drive is what causes people to innovate. The profit motive is about differentiation, rivalry and competitive advantage. To claim that these sources of profitability are improper aspects of the market is really not discussing capitalism at all.

Thanks for the input. Well in fact I don't believe I ever made the contention that there is such a "perfect" state of competition (no more than there is a perfect human, we're all just striving for ellusive perfection), or that having a competitive advantage is unfair. The point is that when companies reach a critical mass, e.g. a monopoly or near-monopoly, oligopoly or monopsony, or when there is collusion between most or all of the principle actors in a market, they are able to wield tremendous control and power, including effects on price, and the ability of new competitors to enter the market. This is a perversion of the whole idea of the marketplace. But your points do well to underline the premise that capitalism has many inefficiencies.

Really? this is why the tech industry, including software is one of hte hottest VC investment pools in all of business. Because innovation is being stifled? This is why Google is smashing into Microsoft and rallying investors to its cause? Please!

Where can I pick up the Google OS? Walmart perhaps? Seriously, there is a clash of the titans here over a lot of things but not in the OS market, Microsoft's bread and butter.

Thomas isn't arguing with you on the right basis, that's true. Your economic arguments are flawed.

Well, besides the fact that you continue to separate the economics and the moral aspects of capitalism, which is an improper analysis...

How...and why?

[KendallJ]

Thanks for the input. Well in fact I don't believe I ever made the contention that there is such a "perfect" state of competition (no more than there is a perfect human, we're all just striving for ellusive perfection), or that having a competitive advantage is unfair. The point is that when companies reach a critical mass, e.g. a monopoly or near-monopoly, oligopoly or monopsony, or when there is collusion between most or all of the principle actors in a market, they are able to wield tremendous control and power, including effects on price, and the ability of new competitors to enter the market. This is a perversion of the whole idea of the marketplace. But your points do well to underline the premise that capitalism has many inefficiencies.

Yes, but it's built into every argument you're making, just in degrees. Some advantage is good, too much is unfair. It's perfect competition thinking with a little Aristotelean golden mean baked in. Simpson deals with the invalid idea of monopoly, and in Thomas' defense so does Cap the Unknown. If all you do is read the Amazon reviews, then I'm suspicious you really ever intended to give the book seriouis consideration.

Where can I pick up the Google OS? Walmart perhaps? Seriously, there is a clash of the titans here over a lot of things but not in the OS market, Microsoft's bread and butter.

OMG, you're kidding right? This is the first error of "monopoly" thinking. Anything is a monopoly if you define the market small enough so as to make it so, and the market can only be defined as that consisting of all similiar products and not its substitutes. Google is sucking the life out of the OS my friend, by unbundling it and porting it's key apps to the web. Other than photo, music and browser apps, most of what i have on my desktop can be done via a web browser and Googles suite. It doesnt' mean that there still won't be somehing running your system one day, but if all it has to do is run a web browser it really is going to be hard to differentiate it. Google is just such an example of how competition to the established encumbents actually happens. It's an example of how we don't need regulation to force people to be able to compete.

Edited January 26, 2008 by KendallJ

[Rourke]

What in the hell do you mean, 'power' and 'control', Rourke? Could you explain how a large corporation like Microsoft controls people, using it's power to force people into making decisions? No, I'm not asking you how Microsoft stays competitive, I'm asking you, how does Microsoft force people to play into it's plans for each Finanical Quarter?

I don't mean to keep using Microsoft for an example, but if Microsoft knows that if it makes it inconvenient enough to use any competing product, a high percentage of people won't switch, even if its better and free. Sure this is reasonable that people would find it in their interest to stay with Windows, most people aren't very tech savvy and need the standardization of it. Meanwhile Microsoft can continue eliminating competition, using the embrace, extend and extinguish tactic. Now Microsoft treads very carefully in order to avoid further anti-trust lawsuits, so its fair to say their strong-armed business tactics would be even more cut-throat in the LF capitalist world.

[Thomas M. Miovas Jr.]

You are arguing the concept A) the morality of an economic/political system, while I am discussing B ) the sustainability or viability of such a system. What you are arguing is the equivalent of the following hypothetical discussion:

ME: If I drop this cinder block from 10 stories onto a man's head, would it kill him?

Well, you started this debate by asking the question: Is capitalism perfect? To which I have been answering: Yes it is, on the proper moral / political grounds of man's life as the standard. So I disagree with you (and evidently Kendall) that I have been talking about some sort of side issue.

Now, if you were to ask me: Does bureaucracy destroy markets -- i.e. kill them -- then my answer is: Yes, absolutely.

By initiating force into voluntary agreements, one kills the incentive to go into that market altogether, except by people who don't mind dealing with bureaucracies. One reason the computer / software industry has progressed so well, even though you don't like some of the arrangements, is that it is not regulated much at all. So, some upstart like Google can take over the search engine market from previous competitors that were actually very good. For example, I used to love to use Alta Vista. It was a great search engine. But, unfortunately, they didn't go public in the stock market before Greenspan "popped the bubble" because he didn't like it, and now no one hears of Alta Vista at all. Before Google, it was the best search engine out there, at least for my purposes.

And if it wasn't for Greenspan doing that, the Internet could have surpassed radio and TV when it comes to the presentation of audio and video. It was quickly catching up with those mediums in very short order -- just a few years -- and was worrying all of those broadcasters. But since that sector of IPO's for good ideas related to the Internet has been destroyed, we may never know what benefits we could be receiving right now from innovators. The Federal Reserve bureaucrat destroyed that market.

So now I have given you several examples about how the mixed economy destroys markets, and so have some others in this thread. In other words, yes, the cinder block would kill him; as it already has in innumerable ways.

[Rourke]

But the fact that it is inconvenient to use is a fact of reality. If Microsoft did nothing, it woudl still be inconvenient to use. Again, you have perfect competition built into the argument. The only idea is where we all share market share, and even better where there are many of us so none of us dominate any part of it.

Tell me, let's say we have 3 competitors with 33% market share each. What are those competitors to do? If I innovate to take share, I increase my "power." That's bad. When the first step competitors take away from your insipid equilibria ends up by definition non-ideal, one had better start questioning his idea of ideal.

This is a distortion of what I said, but makes for a convenient straw man to take apart. Who would object to such a scenario? In fact I really don't understand your point at all. Maybe you could just break off a smaller piece of my argument and chew on it, say, explain why price collusion is okay, or maybe you would choose to contend with the idea that LF capitalism left undisturbed erodes the middle class and masses wealth among relatively few, or possibly the notion that such massive wealth inequality equals a plutocratic state, or that maybe massive economic inequality leads to social/political instability.

Well, if the competing product was that much better, then someone would think it worth the inconvenience. It is a pretty well known fact of nature that upstarts don't win against encumbents by making incrementally imrpoved products. There is a bevy of history that says this, but yet upstarts come into being all the time with innovative products and even come to dominate the market. However coudl this be? To use this the example of imperfect competition means you have little understanding of how new entrants actually enter markets in a true capitalist system.

What happens these days is that the big international conglomerates often buy up the idea/product before it can get much traction. So they can shape and mold it to their advantage without the threat of an upstart business. Due to this likelihood, in the LF capitalist world I don't see how the hegemony of large established corporations could be disrupted.

[Thomas M. Miovas Jr.]

Maybe you could just break off a smaller piece of my argument and chew on it, say, explain why price collusion is okay, or maybe you would choose to contend with the idea that LF capitalism left undisturbed erodes the middle class and masses wealth among relatively few, or possibly the notion that such massive wealth inequality equals a plutocratic state, or that maybe massive economic inequality leads to social/political instability.

Price collusion, as you call it, would be both moral and practical if it suited the purpose of profitability in a capitalist economy. As to the middle class, why are you holding that as sacrosanct? There will always be various levels of income earning ability,and there is nothing wrong with that; in fact, it is good that someone like Bill Gates can make billions while those working for him make their 50k. If it wasn't for the leaders of industry being able to make their fortunes, there would be no middle class, there would just be wallowing misery for untold millions of people. Look at Africa, or Russia, or the former Soviet Union -- there is no "middle class" there, at least not like there is in America. Having wealthy individuals does not lead to a plutocratic state, because everyone is free -- in other words there are no rulers in a capitalist state. And if people get agitated by some people being richer than themselves, then they will figure out how to get rich; it wasn't the desire to get wealthy that lead to the spread of socialism, but rather bad philosophy, the philosophy of resentment -- and in a capitalist country, they wouldn't be permitted to take over the country by force, that's what the police are for.

So, the only person here coming up with straw man arguments is yourself. Most of the stuff you attribute to what would happen under capitalism just wouldn't happen, and the other stuff would not be bad by man's life as the standard.

[Chops]

The point is that when companies reach a critical mass, e.g. a monopoly or near-monopoly, oligopoly or monopsony, or when there is collusion between most or all of the principle actors in a market, they are able to wield tremendous control and power, including effects on price, and the ability of new competitors to enter the market.

But those products which are being monopolized would not exist were it not for the companies that created them. In your ideal world, an individual only has power over his property to the extent that others allow him to have. This is perversion, and this is where the morality of capitalism, which you so casually wish to dismiss, comes in. An individual owns that which he produces, and maintains full control over it.

To insist that an individual only owns his property fully until other claim to want or need it, is outright madness. Those products would not exist without the producer, and if those are the conditions for which I must produce (that anyone can take them at any time by force), then I'll simply refuse to participate in perpetuating my own destruction.

Someone who doesn't fully own what he produces, doesn't own his mind, and is a slave. This is the morality of Capitalism. One cannot detach concepts from their dependent concepts.

[Chops]

explain why price collusion is okay

No one owns products of the producers except the producers, who maintain a full monopolistic ownership of their property. As such, and individual has the right to sell that product at whatever price he wishes to charge. If others wish not to pay that price, they are free to not trade with that individual.

It's really quite simple.

Your claims are that an individual has a right to not be inconvenienced. If Microsoft wishes to charge $3000 for Windows, then many people would be inconvenienced, but they'd pick up something else. If the oil companies wish to charge $70,000 per barrel of oil, they have that freedom. We'd be inconvenienced, but someone would find a more affordable oil source. If the Milk producers colluded and charge Milk at $500/gallon, then we can drink something else. If water companies all charged ridiculous prices, then we drill our own wells (incidentally revitalizing the well-drilling market).

No one has a RIGHT to the products of another, not without the consent of the owner, and not for any price except that on which the two parties agree.

If the government told me that my products must be sold for at MOST X dollars, when I charge twice that, and that I am not free to trade without those terms, I will burn my products and refuse to sell under those conditions. I sell under MY terms, and ONLY my terms.

Edited January 26, 2008 by Chops

[KendallJ]

Maybe you could just break off a smaller piece of my argument and chew on it, say, explain why price collusion is okay,

To follow up to Chops very nice moral argument, I'll be happy to chew this for you.

As I've already pointed out several general mistakes that have been made, I'm sure you'll allow me to point out when you make those mistakes again in subsequent arguments as you're wont to do.

The specific mistakes that prop up arguments for price collusion are

a. a reliance on hypothetical scenarios that ignore alternate resolutions to the problem. Specifically,

b. the confusion between natural and artificial barriers to entry. Price premiums due to natural barriers cannot reflect collusion in any way. (you've arleady made this mistake so many times with the false concept of "vendor lock-in" I'm sure you wont' try it here)

c. price collusion must be able to be broken by any potential competitor, not just some competitors.

d. ignoring the role of government in the scenario

The basic fact of the matter is that price collusion is an ineffective strategy to hold onto competitive advantage in the long term. It doesn't work. Where it is claimed to work in the long term, is where it does not exist and someone is mistaking some other valid reason for price premiums or a scenario that is not in fact lasseiz fair capitalsim as price collusion. Here is an example of the sort of strawman characteristics imparted to these hypotheticals.

David vs. Goliath. Someone puts forward a scenario where the big guys are colluding preventing the small guys from entering. This makes the mistake of c. - it ignores the fact that in LF capitalism, you always develop this thing called the captial market, where by there is ample cash waiting for good investment opportunities. In other words, if collusion exists, a financier can put up the capital to bring a third competitor into the market place. But if the entry requires significant capital, then no financier worth his weight would every finance a small "newbie". Instead he'll go find another Goliath. Many counter this by saying that no financier would do such a thing because he knows the premium is artificial and thereby it will evaporate once he creates his new Goliath. But that same argument works against collusion in teh first place. That is, no incumbent would charge artificial premiums for long because they risk bringing a new competitor into the market place, and once that competitor clears the significant barrier to entry, then the incumbents are going to have a fight on their hands. The natural barrier to entry is a significant competitive advantage and no incumbent will throw that away foolishly by allowing another competitor to be created. In a free market the only way you can do this is to innovate or with price. What results then is a big game of "chicken" between Goliaths, and it is that pressure that will force price to it's natural level. It is the high capital barrier that is a natural aspect of capitalism and the actual price premium that will get charged in the long term will be the price premium that reflects that barrier. Let competitors collude all they want. The price that will be reached in the long term will be the same. It will reflect that natural barrier to entry, not the supposed artificial one of price collusion. It may not look like an equilibrium price in that it is steady but it will be so none the less.

The point about the capital markets is not to be taken lightly. Only the truly ignorant don't understand the immense size and relative ease of availability of today's capital markets. Ease with respect to any viable competitor in a given context, not just anyone.

I see these kinds of claims for monopoly every day, and I see, and experience first hand how the market actually functions, and once you do that, you realize how ignorant the claims of price collusion are. It stems from bad fundamental ideas, mostly from a desire to believe that altruism and egalitarianism are ethically correct, and ignoring the evidence.

Edited January 26, 2008 by KendallJ

[KendallJ]

By the way, the argument that artificial forms of monopoly power like price collusion cannot exist in LF capitalism, is an argument that is made eminently clear in Cap the Unknown Ideal. Maybe instead of continuing to decry the book on the premise that ethics and economics are unrelated it is exactly that premise you should examine.

If unwilling to do that, the Market's Don't Fail might be a better choice.

[Koustubh]

This discussion seems to be going nowhere.

Rourke is arguing that LF capitalism is not practical by raising n different concerns. Answering each concern individually is not something that can happen on a forum. Nothing short of a treatise on economics can tackle all these issues.

And anyway the question "Is Capitalism perfect?" is incomplete if it is divorced from ethics as Rourke wants to do. Without assuming an ethical framework, one would have to ask "perfect for whom and for what purpose?".

[fletch]

This discussion seems to be going nowhere.

That might be true, but the defense of capitalism put forth by Thomas, Thales, Chops, Kendall, and others has been nothing short of fantastic.

[Tenure]

And anyway the question "Is Capitalism perfect?" is incomplete if it is divorced from ethics as Rourke wants to do. Without assuming an ethical framework, one would have to ask "perfect for whom and for what purpose?".

You've summed up the issue perfectly. Well done.

[agrippa1]

I see these kinds of claims for monopoly every day, and I see, and experience first hand how the market actually functions, and once you do that, you realize how ignorant the claims of price collusion are. It stems from bad fundamental ideas, mostly from a desire to believe that altruism and egalitarianism are ethically correct, and ignoring the evidence.

I don't disagree with this discussion, but what do you have to say about local or regional price fixing. A large corporation must grow from a small company, that is, it must start out with a limited scope in terms of size, business area and location. To take a simple example, let's assume that some pro-union do-gooder wants to fight back against WalMart, so he opens a Mom&Pop in his home town to compete. Let's also assume he's discovered some business principles and made some strategic alliances that allow him to compete successfully with Walmart on price and quality. He opens up and is flooded with customers happy to see better prices etc. Things go along just fine, then one day, no customers come in.

He looks across the street and sees a big sign on the front of Walmart: "50% Off Everything!!!"

He waits it out. Weeks go by, and the sale continues. He consults his wholesalers and they agree to temporary price breaks to keep him afloat, and he drops his prices by 50%. Customers flood back in. A few days later, no customers. He looks across the street, knowing what to expect, and sure enough: "75% Off Everything!!!" He waits it out. His distributors can't take any more price cuts. He drops his price to match Walmart, and six weeks later goes out of business. The next day the Walmart sale is over.

Walmart is able to do this without suffering a loss because it can recoup its profits at its 20,000 other stores.

On the broader scale, a Walmart could charge high prices as long as a large competitor doesn't emerge. If a large competitor emerges, Walmart lowers its profits to subsistence to make competition not sufficiently profitable to justify a reallocation of capital resources. If the competitor is regional or local, this advantage is even easier to realize.

The problem I see with the anti-monopoly argument is that it's based on steady-state conditions. A company can't operate at a loss for a long time or over it's entire range of business. But it can target unprofitability strategically over a short period or a small area, in order to keep competitors out. Once the coast is clear, it can raise prices again and return to high profits.

(BTW, I use Walmart only for emotive purposes. I don't shop there, but I admire their anti-union stand, and I would shop there if there was one closer to me.)

[Galileo Blogs]

I don't disagree with this discussion, but what do you have to say about local or regional price fixing. A large corporation must grow from a small company, that is, it must start out with a limited scope in terms of size, business area and location. To take a simple example, let's assume that some pro-union do-gooder wants to fight back against WalMart, so he opens a Mom&Pop in his home town to compete. Let's also assume he's discovered some business principles and made some strategic alliances that allow him to compete successfully with Walmart on price and quality. He opens up and is flooded with customers happy to see better prices etc. Things go along just fine, then one day, no customers come in.

He looks across the street and sees a big sign on the front of Walmart: "50% Off Everything!!!"

He waits it out. Weeks go by, and the sale continues. He consults his wholesalers and they agree to temporary price breaks to keep him afloat, and he drops his prices by 50%. Customers flood back in. A few days later, no customers. He looks across the street, knowing what to expect, and sure enough: "75% Off Everything!!!" He waits it out. His distributors can't take any more price cuts. He drops his price to match Walmart, and six weeks later goes out of business. The next day the Walmart sale is over.

Walmart is able to do this without suffering a loss because it can recoup its profits at its 20,000 other stores.

On the broader scale, a Walmart could charge high prices as long as a large competitor doesn't emerge. If a large competitor emerges, Walmart lowers its profits to subsistence to make competition not sufficiently profitable to justify a reallocation of capital resources. If the competitor is regional or local, this advantage is even easier to realize.

The problem I see with the anti-monopoly argument is that it's based on steady-state conditions. A company can't operate at a loss for a long time or over it's entire range of business. But it can target unprofitability strategically over a short period or a small area, in order to keep competitors out. Once the coast is clear, it can raise prices again and return to high profits.

(BTW, I use Walmart only for emotive purposes. I don't shop there, but I admire their anti-union stand, and I would shop there if there was one closer to me.)

Perhaps Wal-Mart could do these things, but you are incorrect when you say they do it "without suffering a loss." If the prices are below their costs of operation, they do suffer a loss, and that loss must be paid for. In fact, each time they do what you describe, they accumulate another loss. Each of these losses must be paid for. How do they do that? They do it by consuming some of their capital. Either they take on debt, or they have to pay smaller dividends to their shareholders. If they take on debt, interest must be paid on that debt. That is an expense, which raises their cost of doing business. If they reduce their dividends, Wal-Mart finds it harder to raise equity capital and therefore expands more slowly.

As you can see, there is no way a business like Wal-Mart can afford to take losses on its operations. In actual fact, stripping away the hypothetical nature of your scenario, Wal-Mart has achieved its scale, not because it takes losses to drive out its competitors, but because it has achieved a lower cost of operation. Wal-Mart's operational costs are lower because it can buy in massive quantities at low cost, distribute efficiently using economies of scale, and gain great advertising synergies because of its large size. As a result, it profitably sells for less than its competitors. As proof, just pick up one of Wal-Mart's annual reports and study its growth in net income.

If a mom-and-pop store tries to compete head-to-head with the low-cost efficient stores Wal-Mart has developed, it will find it cannot compete.

In fact, the only way mom-and-pop stores really can compete is if they have achieved some operational advantage that Wal-Mart doesn't have. This could be grand or it could be simple. A grand advantage might be the invention of a superior way of warehousing and distributing merchandise based on some new technology. A simple advantage could be a superior store location, better customer service, or a product mix that is more specifically tailored to the local market.

The fact is, many small mom-and-pop stores do compete with Home Depot and Wal-Mart by offering the simple advantages I describe.

However, the larger point is that Wal-Mart's gain is the gain of everyone who chooses to do business with Wal-Mart. No one's rights are violated by Wal-Mart's success. If Wal-Mart can figure out how to sell me something for less than the store down the street, I say thank you and buy that product from him.

If a competitor to Wal-Mart cannot match Wal-Mart's prices or service, by what right does that competitor demand that Wal-Mart's customers must be forced to patronize him? To demand that Wal-Mart be punished through antitrust or that taxpayers subsidize the less successful store is a violation of everyone's rights.

In capitalism, everyone is free to compete, but no one is entitled to success at others' expense. The essential principle here is a person's right to life and property. That is violated if shackles are put on Wal-Mart to indulge some right-to-exist demanded by the less successful store.

The economic point is that by respecting property rights, businesses under capitalism constantly create an ever-widening plethora of new and lower-cost products that we all enjoy. Those products, such as cheaper foods and electricity, new entertainment devices such as iPods, etc., raise our standard of living. To violate property rights by subsidizing the less successful is to sacrifice all that. To shackle Wal-Mart and other highly successful large companies like them is both immoral and impractical. It violates the rights of Wal-Mart's owners, employees, and its customers. Unsurprisingly, it also reduces our standard of living.

[KendallJ]

Let's also assume he's discovered some business principles and made some strategic alliances that allow him to compete successfully with Walmart on price and quality.

Walmart is able to do this without suffering a loss because it can recoup its profits at its 20,000 other stores.

Hi Agrippa,

First off what you're describing is not price fixing or collusion. It goes by a false concept known as "predatory pricing". Cap the Unknown Ideal addresses this too so I'd start there. The first problem is that this a David and Goliath scenario, and I've already talked about the fact that just because this small operator cannot survive does not mean that predatory pricing works. The first problem with the senario is the statement above in red. The small guy hasn't discovered enough because he can only compete on an instantaneous basis. As such, he is making a big mistake trying. Small guys should never go against large guys based upon price. It's an error in business judgement, not an example of a functioning market. There are small shops all around, but in order to stay viable, they must offer something of value that the Wal-Mart model can't, maybe proximity to a neighborhood, or specialty foods. THis is known as a "niche" player, and they survive in Walmart's shadow all the time.

The other problem I see, is making the assumption that Walmart is only threatened in this manner at one location. The fact is if one guy can do it (which I doubt) a guy at every other location can do it too, and so that "make-up" base of other stores doens't really make up.

On the broader scale, a Walmart could charge high prices as long as a large competitor doesn't emerge. If a large competitor emerges, Walmart lowers its profits to subsistence to make competition not sufficiently profitable to justify a reallocation of capital resources. If the competitor is regional or local, this advantage is even easier to realize.

The problem I see with the anti-monopoly argument is that it's based on steady-state conditions. A company can't operate at a loss for a long time or over it's entire range of business. But it can target unprofitability strategically over a short period or a small area, in order to keep competitors out. Once the coast is clear, it can raise prices again and return to high profits.

This whole idea of a price war is interesting, but the reality is that it is self destructive. Again, walmart cannot engage this sort of battle at every store. The reality is that Wal Mart attracts customers because of the fact that it's prices are the lowest all the time. Not because they push others out and then raise the prices above the levels they were at. This is the myth. WalMart is able to still make good profit by doing what no one else can, and the person who benefits is the consumer.

Predatory pricing like collusion is not a long term viable strategy to follow, naturally.

[softwareNerd]

Like Walmart, people used to use the large airlines as examples of organizations that could use "predatory pricing" to keep smaller guys out. Turns out that the smaller guys like Southwest and Ryan put the larger airlines to shame.

Better example: WalMart was not the first large retailer. Roll back the clock to when Walmart had just a few stores. K-Mart was huge, and would have loved to keep out competition. Yet, they could not stop WalMart. WalMart manages to push more small retailers out of business than KMart did for one simple reason: WalMart is able to be far more cost-efficient that K-Mart ever was. I say: "Save money. Live better."

[Galileo Blogs]

Like Walmart, people used to use the large airlines as examples of organizations that could use "predatory pricing" to keep smaller guys out. Turns out that the smaller guys like Southwest and Ryan put the larger airlines to shame.

Better example: WalMart was not the first large retailer. Roll back the clock to when Walmart had just a few stores. K-Mart was huge, and would have loved to keep out competition. Yet, they could not stop WalMart. WalMart manages to push more small retailers out of business than KMart did for one simple reason: WalMart is able to be far more cost-efficient that K-Mart ever was. I say: "Save money. Live better."

It's a good point. Every large company began as a small company. And yet those small companies beat their larger competition to become large companies themselves. The reality of market competition belies the claim that fat, lazy and incompetent entrenched "monopolists" can suppress their nimble competition. Of course, I am leaving out true monopolists from this statement, i.e., companies that have managed to gain the coercive power of the state to forcefully keep out competition. E.g.: the postal service or the local utility monopoly.