August 2, 2011

Protect Small Business From Big Business

‘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).
"Small business creates most of the jobs.", Paul Ryan, Republican Congressman, Fox News Sunday, 8/7/11
Why is our government and conservatives not protecting small business from big business? Could it be that the large oligopolies are also large contributors to our politicians?

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. (The auto industry is now an exception to this in that it is very competitive as a result of foreign competition.)

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 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 that government was not objecting so they followed the same path with little concern 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 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. Small business is said to be the major contributor to job creation. Why is it that our politicians are not defending these small business from the job stealing large corporations?

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 and cell phone 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 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.

2 comments:

  1. ", envisioned many consumers buying goods and services from many producers with everyone looking out for their self-interest"

    Actually, the relationship is more direct than you put it- Adam Smith said that market transactions were pretty explicitly about playing to the self-interest of the other party, not about serving their own self interest. Profits were, thus the result of mutually beneficial trades from two people trying to maximize the outgoing benefit, not selfishly trying to take advantage of each other.

    This also applies to employment- we tend to forget, because of huge amounts of propaganda and social construct trying to teach us otherwise, that labor pricing is also a market negotiation. In a healthy market, an employment contract should be about an employer making a potential worker want the position as much as it is about the worker making the company want them; this would lead to better results overall than the current system that allows companies to squeeze workers against their need to survive and force them to accept lower wages than a more natural transaction would produce. Labor Unions help to level the field a little, but they wouldn't be necessary if companies started from a Fordist perspective: Our workers are also our consumers; the better we pay them, the more they'll buy from us.

    One of his beefs with large companies was, pretty explicitly, that they began to focus more on profit without regard to mutual productivity, because shareholders had no personal stake in the product or the relationship of the company with its customers and community, only in the profits that it produced for them.

    As for insurance his take was actually in support of economies of scale but very tightly controlled ones. His position was that, since the business of an insurance company (or a commercial bank, for that matter) could be reduced to an actuarial table, competition only really offered temptation to deviate from that table, so instead it was fine to allow them to grow to monopoly proportions, but under tight regulation that forced them to stick to their formulas and not try to bend them for extra profit.

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  2. I also believe that small businesses creates more jobs than those big companies. For added protection, small players must have their insurance coverage to avoid liabilities in certain incidents that can happen to their businesses.

    business insurance

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