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This is a reprise of a blog posting from August 2011
Most students of economics
are aware of the tendency of 'perfect competition' to zero
economic profit over time, unless there is a continual renewal
and reinvention of the business, under the guidance of a wise, insightful,
and responsive management. Even the best enterprise involves a risk
of loss, the expense of well paid employees, and significantly hard work, all
combined with a bit of luck. Little wonder that a minority of businessmen
find this arrangement less satisfactory that other alternatives, which
unfortunately includes various forms of cheating, if not outright fraud.
And therefore there is a constant tendency of participants
in capitalist systems to foster the unreasonable profits of cartels and the
stable pricing power of monopolies, natural or otherwise, with a measure of
discretionary control over resources and choices, legislation and
information, and political and monetary power.
Corporations are merely creatures of the law, and inferior
to it. Without it, they don’t exist. What better way to create the supreme
monopoly and maintain it in perpetuity than to skew the law in one’s favor?
When corporations obtain an inordinate amount of
power over the social fabric of regulation and governance, the creation of an
oligarchy distorts the real economy through the accumulation of too much
power in too few hands, in the manner of the central planning bureaucracies
of the old line communist nations.
And this is why the standard economic solutions of both
stimulus and austerity for normal cyclical excess can be doomed to failure,
as they are at this time. The system itself has become distorted and broken,
and is badly in need of reform. Whatever one puts into it will come out
badly, and be turned to fruitless purposes, corrupted by the unprecedented
concentration of power in the hands of the few, the partnership of
the Wall Street banks, big media, multinational corporations, and their
servants in the government.
The hallmark of a corrupt enterprise is that
while it has the power to confiscate and destroy, it cannot
create sustainable organic growth and recovery that benefits the broader
public. This may be a private monopoly or collection of monopolies, or
a government chartered agency, or a government itself. The characteristics
of all of these can be very similar. It is merely the details of their
legal composition that differ.
The modern, somewhat romantic
theory of naturally efficient markets peopled by inhumanly
rational and altruistic individuals is a fairly modern twist on the noble savage ideal of Rousseau, and just as other-worldly and
impractical when applied to a modern society. Certainly no one who has driven
recently on a modern highway in rush hour could believe it.
The corrupting tendencies of the concentration of power is
an intriguing idea, with an historical resonance from the trust-busting Teddy
Roosevelt, and his distant cousin Franklin, as well as the famous observation
of Lord Acton:
"And remember, where you have the concentration of
power in a few hands, all too frequently men with the mentality of gangsters
get control. History has proven that."
Nineteenth century Americans viewed the business
trusts as un-American "internationalists, and heartless,
abusive exploiters of the public interest." And rightly so. They looked
for relief to the reform of their government, and the power of
democracy and the law.
This struggle of the individual to maintain a balance of
power with the organizations, whether they be the corporation or the state,
is a recurrent theme, a continuing saga throughout human history. Big
Government and Big Business have both been inimical to human freedom.
Whether such an accumulation
of power in a few hands is achieved by the gun and star chamber, or the pen
and the bribe, may not matter to the end result, which is a society plagued
by corruption, stagnation, and at its end, a growing instability with a resort
to physical force and more overt repression on its own people.
Central Planning - It's not Just for Communists Anymore
It's been a rough few weeks for the capitalist system,
which bestrides the globe like a teetering colossus. Not only has there been
stock market turmoil worldwide, and the temporary threat of a US default on
its debts, but an esteemed, mainstream economist suggested that Karl Marx was
right. In the Wall Street Journal, no less! Karl Marx Was Right
That would be Nouriel Roubini, whose claim to fame came
from timely warnings about the US housing bubble and subsequent US stock
market collapse.. It is important to note that he only said that Marx was
right in that capitalism could collapse on itself,
not that it actually would.
Most people are familiar with the spectacular failures of
central planning in the Communist regimes. According to the resurgently
fashionable Austrian school of economics, an economy is too complex to be
managed by one expert, or even one committee of experts, regardless whether
the clubhouse door reads "Politburo" or "Shark Tank."
According to the Austrians, society's fastest path to
prosperity consists of allowing every person to decide freely what is in
their best interest, with the emphasis on individual transactions.
A biological analogy comes from flocks of birds, schools
of fish, and ant colonies, among others. These swarms function extremely
well, despite being composed of simple creatures following simple rules, and
despite the anarchic lack of a leader directing things. Our own "simple
critter rules" in modern society are probably along the lines of
"try to get a higher paying job, and pay lower prices for stuff, within
the laws of the land, and without making too many enemies."
A business analogy comes from Toyota. Their quality went
from hopeless to fearsome by training every employee to be competent enough
to figure out how to do their own job better, and then allowing them to do
so. If their management tried to dictate how each task was to be done, they
might have peaked at early-80’s American car maker quality levels.
In a similar way, they decided not to try to predict the
right production levels for each model, colour, and trim. Instead
they pre-built enough cars to fill dealership inventory, and each time a
customer purchased a vehicle, they would build one more of
that same model, colour, and features. In economic nerd speak, they
responded to that "market signal". So if 5% of Corolla drivers
wanted a green car with deluxe extras, in the long run 5% of Corolla
production would consist of deluxe green vehicles.
Since the flaws of central planning and benefits of
distributed decision-making occur in the public sector, the private sector,
and even in biology, we can generalize that the USSR's economic problem was
ultimately that a small group of people would decide how to (mis)allocate
most of the country's resources.
In the past thirty years, there's been an immense
concentration of wealth -- particularly in Anglo-American countries (the US,
UK, us, the Aussies). The US is at the leading edge of this trend, with the
top 1% owning 42% of the wealth, or about six times as much as the bottom
four fifths of the population, and a significant portion of the means of
production and public information (media) and influence over the course of
society.
In recent decades Western capitalism has moved towards the
central planning model of a relatively small number of people in charge
of directing the allocation of resources. This narrowing of perspective
has in turn led to policies progressively more disastrous for the moved and
the shaken... which was the Soviet denouement.
Capitalism's path back from the self-perpetuating central
planning will require a more equitable, or at least a less inequitable,
distribution of wealth and power, by which to rebuild the middle class and
promote decision making based on individual choice and a more widely based
entrepreneurial meritocracy. Which is what Roubini was complaining about, in
saying that too much wealth was being redistributed from labour to capital.
It would be a terrible irony if Marx was proven
correct, and unchecked capitalism destroyed itself by evolving the
self-crippling features of a centrally planned communist economy. One
can only hope that we can reform our current market systems before things get
worse.
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