Monday, December 08, 2014

Economics and the myth of the market

Many years ago I took a degree in economics from one of the UK's more prestigious universities. Much of what I learned has long since departed the brain but I can still remember the core of the theory of perfect competition - the idea that the optimal way to manage production and ditribution of scarce resources is to have many competing organisations both buying and selling so that none can gain an advantage over the rest by virtue of its size. This notion is so powerfully ingrained that generations of politicians mouth about "the markets" without having a clue about the unbelievably ludicrous conditions required to make "perfect" competion actually work (one is that everyone has access to the same information about the future at the same time so that nobody can gain an unfair advantage, another is that there is no such thing as intellectual property, a concept treated as trivial by the 19th century economists like Mill and Marshall). I don't have the inclination to go into it all now, and you certainly don't want to read it, but take it from me, the only economy where perfectly competitive markets could exist, and then produce the "optimal" result, is Fairyland.

In the real world, markets do not produce the best results in the sense meant by those economists who founded the theory of markets and relating theories about "economic welfare" (which is nothing to do with the Welfare State). We had a typical confirmation of this with the story that Premier Foods, a giant in the processed foods business, was requiring upfront payments from the myriad of small firms who supply it. Monopsony, we used to call that, meaning a single buyer wielding power over many sellers. It indicates a catastrophic breakdown in the competiveness of the market. Any politician who claims to believe in markets (Mr. Cameron? Mr. Osborne?) should be demanding the immediate breakup of Premier Foods into at least thirty competing firms. But they are not.

You can, of course, believe that unfettered capitalism, which creates huge businesses wielding enormous economic power, is a good thing in itself. You can believe that competitive markets, in the economic sense, are the best way to run the economy. But you cannot believe both. They are different things. As it happens I believe that the first is awful and the second impossible, and we need a third way. But that is another story.

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