[ergoproxy]

I have a different take on this article than most. I'm a proponent of Classical economics, and I reject all modern schools of economics--neoclassical, Austrian, Keynesian, etc.

Classical thinkers like Adam Smith expounded how rational self-interest and competition together lead to economic prosperity. There's a balancing act going on between self-interest and competition--competition is the economic faculty that restrains self-interest.

Only in perfect competition do we get Pareto efficiency--the state in which it is impossible to make any one individual better off without making at least one individual worse off.

Unfortunately, modern schools of economics have diminished the role of competition. Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil. The result has been a state of affairs wherein the vast majority of people are getting worse off.

WRT government intervention in the markets, Adam Smith would not oppose intervention that fosters competition and stifles monopoly. The goal of the 1890 Sherman Anti-Trust Act was to foster competition, not to diminish "economic freedom."

"Economic freedom" is a mostly meaningless buzzword that's thrown around by both libertarians and socialists. Indices of "economic freedom" as compiled by the Heritage Foundation and the Wall Street Journal serve no other purpose than propaganda.

It's impossible to divorce politics from economics in the real world. Adam Smith understood this. The subject used to be called "politico-economics."

Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power. Until people start to wake up and realize all monopoly power is evil and what we need instead is more competition, things will continue to decline.

[nhaehnle]

Keynesianism lauds government monopoly power; while neoclassicism and Austrianism foster private monopoly power. Both are evil.

At least in the case of government, you may feel that it is evil, but it is necessary [0]. So the more pragmatic and productive approach would be to think about how this monopoly power could be used to further prosperity and equity of the people.

Today, the Left favors reforms to give government more monopoly power. While the Right favors reforms that give firms more monopoly power.

I think both those characterizations are a bit simplistic. Look at the discussion surrounding surveillance, secret courts and the police state, for example.

[0] This is true even within the economy: having a common measure of value is important for doing business, so you need currencies to have large scopes. Whoever ultimately controls a currency necessarily has a lot of monopoly power. So the question is not whether such powers exist, but how they should be structured subject to goals that we need to set for ourselves as a society.

[ergoproxy]

I was speaking specifically of monopoly power, i.e., the power to raise or lower prices in the market. And no, neither government nor private firms should have this power. Monopoly power is an example of market failure. In a competitive market, all participants are price takers, i.e., passive agents incapable of changing the market price. In perfect competition, in every transaction, at least one party is better off, and nobody is worse off. That all changes when somebody gets the power to set prices; then transactions leave some people worse off.

There are kinds of power besides monopoly power, such as coercive power. WRT coercive power, that's best monopolized by a democratic government accountable to its people. And government can and should use it's monopoly on coercive power to promote competitive markets. Instead, its been empowering monopolies.

But people today aren't well informed enough to make demands on government to promote competition or hold politicians accountable. They're given bogus ideologies (neoclassicism, Keynesianism, etc.). And they're given the false choice between Left and Right.

The terms "Left" and "Right" are not merely overly simplistic. They're total falsehoods, fabricated by self-interested parties to delude people into thinking they either need to give government more monopoly power or else give private firms more monopoly power. There is a third choice that's left unmentioned: Government can promote competition.

[nhaehnle]

I appreciate your engagement in this discussion. I think the notion of a competitive market as you define it [0] is inherently flawed. To quote:

> all participants are price takers, i.e., passive agents incapable of changing the market price

That makes no sense. If all participants cannot influence the price, then where does the price come from?

Logically speaking, once you abstract away from all sorts of fluff, everything that happens in a market is ultimately the result of the action of one or more of its participants. That is, if participants were unable to change the market price, then why would the market price ever change? Why would there be a price in the first place? The fact is that participants are necessarily able to change the market price, whether you want that or not. The only question is how this power is distributed and what the consequences are.

Having competitive markets in the sense of low barriers to entry etc. is clearly a good thing. But in the sense you've defined them, they are either useless or self-contradictory.

Interestingly, for every market, somebody has the (or at least some) power to set prices. Despite of what you write, most transactions are mutually beneficial anyway. Why is that?

I believe this is actually because the vast majority of markets aren't efficient in the efficient market hypothesis sense, and transactions aren't happening at the margin. For obvious transaction overhead and opportunity cost reasons, most transactions are only ever realized if they increase the total welfare not just by some epsilon, but by a significant percentage.

The really interesting question is how this large benefit is distributed between the transacting parties, and I would wager that the power to set prices does actually have a big influence there. That is, whoever actually gets to set the sticker price (for example) is bound to capture a larger fraction of the benefits than the other party, even if the transaction is overall still beneficial to both.

For this reason, I think the problem isn't even so much that transactions leave people worse off. That only happens comparatively rarely. The much more significant problem is when unequal power relations are exploited to give somebody a benefit that is deemed to be unjustified. [1]

The prototypical example would be the millionaire in the desert who is near death by thirst. If she signs over her entire wealth in exchange for a bottle of water and a ride out of the desert, then clearly, this is a transaction that is beneficial to both parties. Yet only the most psychopathic internet-libertarians would ever think that such a transaction was okay in any sense. The problem was not a lack of mutual benefit, but an exploitation of unequal power relations.

[0] And I suppose others define it in the same way, perhaps even a large group of economists.

[1] By the way, this is the root of the classical criticism of capitalism: that the surplus value of labor is siphoned off by capitalists, leaving workers with only a small amount. Even though employment contracts are typically mutually beneficial in the narrow, technical sense, there is the fact that the employer often exploits the reality of unequal power relationships.

[ergoproxy]

> That makes no sense. If all participants cannot influence the price, then where does the price come from?

You are assuming that the dynamics of an economic system is nothing but a summation of the individual dynamics. This assumption excludes the possibility of the emergence of complex structures from simple individual behaviors.

I strongly suggest you take a look at the subjects of Complex Systems[1] theory, Nonlinear dynamics[2], Catastrophe theory[3], and Chaos theory[4]---all consistent, mathematically well grounded theories which allow for the emergence[5] of aggregate behavior that cannot be explained simply in terms of individual behaviors. There is also the emerging field of Complex economics[6]. Donald Saari wrote an introductory paper called the Mathematical Complexity of Simple Economics[7].

[1] http://en.wikipedia.org/wiki/Complex_systems [2] http://en.wikipedia.org/wiki/Dynamical_system [3] http://en.wikipedia.org/wiki/Catastrophe_theory [4] http://en.wikipedia.org/wiki/Chaos_theory [5] http://en.wikipedia.org/wiki/Emergence [6] http://en.wikipedia.org/wiki/Complexity_economics [7] http://www.ams.org/notices/199502/saari.pdf

[nhaehnle]

What you write is not an argument against what I wrote, and you make incorrect assumptions about what I'm assuming.

You yourself talk about the possibility of the emergence of complex structures from simple individual behaviors.

In other words, you acknowledge that it is the individual behaviors that are necessary for the complex structures to exist. There may not be a simple linear relationship between the individual action and the ultimate outcome, but that doesn't change the fact that individual actions have an influence on the market price.

It also doesn't change the fact that without individual actions, a market price would never change (and would never exist in the first place), and that therefore, individuals have some power over the market price.

That does not mean that an individual can just dictate what the price should be without any constraints, but it does mean that your definition of a competitive market is a meaningless phantasy that cannot possibly exist.

The whole field of optimal control theory is about how to control complex structures that emerge from individual controls.

Edit to add: By the way, outside of the theoretical argument, I think it's a good idea to take a brief look at what kind of markets exist empirically. In all markets that actually exist, it is obvious that there are actors who are capable of changing the market price.

This holds for exchanges, where actors change the price by buying or selling. It also holds for more everyday markets where it's typically the seller who puts up a sticker price. For example, the people running a supermarket set the price for the items in the supermarket.

One last thought: My argument is basically that for every market, there is some function f whose outputs are the prices in the market, and that the only inputs of this function is the history of actions of market participants (the shape of the function depends on the structure of the market).

My argument then continues to say that since the market price is a function of only the actions of the market participants, there must be at least one market participant whose actions influence the price, otherwise the price could never change. This is a simple mathematical statement.

Your attempted counter-argument is that the function f could be very complicated, which is completely irrelevant to my argument.

[ergoproxy]

> you acknowledge that it is the individual behaviors that are necessary for the complex structures to exist.

Monopoly pricing and price fixing are not any of the individual behaviors necessary to get a market price, and that's all I was arguing.

In the absence of monopolies and cartels, market prices will emerge from individual behaviors, without any one individual having the power to set the price.

> a competitive market is a meaningless phantasy that cannot possibly exist.

If competitive markets don't exist empirically, that's not a flaw in the theory of Classical economics, it is merely a symptom of corrupt culture and politics. It means we don't really have a free-market system---

What we have today is more akin to Mercantilism. And with income inequality increasing at an accelerating rate, our society will soon devolve back into Feudalism.

> Your attempted counter-argument...

My argument isn't with you. My argument is strictly anti-monopoly and pro-competition.

[audunw]

Excellent points! I like your thinking.

Although I agree to classical economics as the ideal, I'd argue that there are some moral arguments to limited government ownership and even monopoly in certain areas. That is, to guarantee a certain level of service, to handle natural monopolies, and to ensure that profits from large natural resources are distributed to the people rather than the few who has the capital, the luck and the political influence to acquire the mines/oil fields/etc.