Friday, February 18, 2011

Free our Free Markets!

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.’ (Adam Smith, The Wealth of Nations, 1776).
 What does the American auto industry, the health care industry, wall street firms and the banking industry all have in common; other than they were all on the brink of failure?

These are industries where the production side of the industry is no longer a free market with many producers competing head-to head to earn the business of consumers, or customers, of the industry. Instead each of these industries are controlled by a relatively small number of very large corporations that have transformed these markets into oligopolies.

Adam Smith when he discussed “rational self interest” and competitive markets in his book Wealth of Nations, envisioned many consumers buying goods and services from many producers with everyone looking out for their self-interest. By keeping markets “free”, producers pursue their rational self-interest and this best meets the needs of the consumers and the citizens of our country, who are also looking out for their self-interest. Under this system, what is in the producers self interest is to provide the best product possible to the consumer, while striving to be a low cost producer for their niche.

This consolidation of markets began in the late 1960's early 1970's in the auto industry when it was transformed from a free market to an industry that was controlled by three giant corporations and one union. As this transformation was occurring the auto company's and auto union's self-interest became separated from what the consumer wanted and/or needed. Competition between the companies broke down and this gave an opening for foreign competition to enter our markets and the beginning of the end of the American auto industry as we knew it.

Other industries saw what was happening in the auto industry and saw that government was not objecting so naturally they followed the same path with little concern on any ones part that we were losing our free market system to a more centralized market system of oligopolies. As a result we now have major markets where the producing entities self-interest is not always in line with the self-interest of the consumer. What is in the self-interest of the entities in these industries is to keep the oligopoly alive. Thus the creation of special interests and lobbyists.

These oligopolies have bought the protection of our representatives in Washington and state capitals. I am always baffled by the fact that corporations and unions cannot vote in this country, however they are allowed to buy votes with their contributions.

We lost track of a key ingredient that Adam Smith identified as necessary in order for “rational self interest” to work. There must be many producers. In too many industries, the number of producers has shrunk and the ones remaining have gotten “too big to fail”. This is true in the auto industry, the banking industry, wall street, health care and will soon be true in the computer software industry.

When discussing the health insurance industry proponents for this specific oligopoly site the fact that the bigger the insured pool, the lower insurance premiums can be. However, I submit that this "bigger pool savings" is more than offset by the fact that the rational self-interest of the companies is not totally aligned with the rational self interest of the insured. The insurance industries self-interest is to keep the oligopoly alive. The self-interest of the insured is to have as many insurance companies as possible clawing to get his business and thus ringing out all excessive cost, including unconscionable salaries for top executives, to earn the consumers business.

The liberals are right that regulation is required and conservatives are right that a free market is the best way to meet the needs and wants of our citizens. The common ground is that regulation is essential to make our markets more free. We have too many industries where companies have too much power, their self interest is not aligned with the citizens of this country and they are too big to fail.

It is time that our politicians breakaway from the shackles of oligopolies, special interests groups and lobbyists. Use antitrust legislation to bring back free markets.

4 comments:

mike said...

You wrote
However, I submit that this "bigger pool savings" is more than offset by the fact that the rational self-interest of the companies is not totally aligned with the rational self interest of the insured. The insurance industries self-interest is to keep the oligopoly alive.
I'm not a religious believer in free markets like many. Markets certainly fail and I think you are on the right track here by looking at oligopolies. However, the marvelous thing about the 'invisible hand' is that producers and purchasers interests do not have to align.

Banicki said...

I agree their first priority is to keep the oligopoly alive. If government did its' job and eliminated this possibility, the market would be better served.

Edward Murray said...

Is there any evidence anywhere that you can reform the political process by regulating campaign contributions?

It seems that you when you elect representatives, you have a two-fold problem.

The first is that elections are expensive and growing in cost so politicians need money and are then indebted to those who provide it.

The second problem though is not directly a money problem, but the fact that elected politicians have to weigh every step they take in light of whether it will help them be re-elected, or help those who finance their re-elections.

Even if you could find a way to solve the problem of financing campaigns, you would still have a dysfunctional government because politicians act first to ensure their re-election, not to advance the commonweal.

I have no idea how you get there, but I suspect that the only real solution is to completely eliminate elections and simply appoint representatives much as we deal with judicial matters with selected representatives of the community in the form of a jury.

Anonymous said...

Edward Murray

Campaigns are more expensive then they need be because money is available from large corporations and unions. If this was eliminated the cost would go down and the quality of the campaign would rise.

Campaigns today tend to start the day after the last campaign. This was not always the case. In the '70's campaigns did not get stated until the year of the election. This would save cost.

In addition, Without corporate and union contribution, the elected officials would be obligated to "the people" instead of corporations.. They would be judged and reelected by how well they met the needs of the people instead of who paid them the most
money.

I read somewhere that the average politican spends 70% of his yime campaigning and raising money and only 30% doing the work of the people. This is backwards.